As global markets are roiled by some serious concerns, we at Beyond Bulls & Bears feel it’s a valuable time to take a deep breath and reflect on the sources of potential. After all, the late, great Sir John Templeton believed that for the astute and patient investor, times of maximum pessimism could yield great values. We caught up recently with Portfolio Manager Par Rostom of Franklin International Growth Fund to discuss the strategies he’s employing to find value for this mid- to large-cap international growth portfolio.
Beyond Bulls & Bears: The mandate of Franklin International Growth Fund requires you to focus on non-US, mid- to large-cap companies with long-term growth potential. What kind of growth potential are you seeing in that segment of the market today?
Par Rostom: We are seeing some pretty good potential because we invest in companies earlier in their life-cycle of growth. These companies have focused business models with generally one or two business lines. The portfolio reflects a barbell approach of investing in higher and medium growth companies. The higher-growth companies on one end of the barbell may have more volatile growth from year to year, and the medium-growth companies on the other end of the barbell usually have a steadier growth outlook.
Beyond Bulls & Bears: Looking at another angle of the strategy, you focus not only on growth, but on long-term sustainable growth potential. How do you define “long-term”? And what company characteristics do you deem indicative of sustainable growth potential?
Par Rostom: We actually forecast growth for our stock holdings looking out five years, which is a relatively long period, with explicit estimates in our analyst forecasts.
Now before we go out and forecast a company’s future growth potential, our analysts look back five to 10 years to make sure we appreciate how sustainable the growth has been historically. They also talk to management, to competitors, to consultants, and to peers so that they are confident that the growth is likely to be sustainable.
The companies we invest in are innovative; they generate, healthy free cash flow—that’s a key criterion for us—and they invest that free cash flow for long-term sustainable growth potential, either organically or by going out and buying companies.
Beyond Bulls & Bears: Given the strong returns in emerging markets over the past 10 years, many international growth funds have invested heavily in those markets. In contrast, Franklin International Growth Fund is invested primarily in developed markets—why hasn’t your fund joined the party?
Par Rostom: Actually the strategy has usually had less than 10% exposure to emerging markets, which is lower than many of its peers. We have generally found it difficult to get comfortable with the level of corporate governance in the emerging market companies we have seen. Specifically, we found it challenging to find good board independence, accounting transparency, and importantly, a management team that is generally aligned with minority shareholders. That said, we have identified and invested in a couple of emerging market companies that do meet our criteria.
Beyond Bulls & Bears: Par, since this is the first time we’ve spoken with you for Beyond Bulls & Bears, could you tell us something about yourself that we can’t find on your resume?
Par Rostom: I grew up on a tropical island in the Indian Ocean called Mauritius, and I came to the US about 20 years ago for my undergraduate studies. Interestingly, one of the skills I learned by living on a tropical island is how to deal with hurricanes, and those skills have come in pretty handy as we deal with these stormy financial markets.
Beyond Bulls & Bears: Good point, Par.
Until next week, Beyond Bulls & Bears leaves you with a quote from Sir John Templeton:
“For those properly prepared in advance, a bear market in stocks is not a calamity, but an opportunity.”
What Are the Risks?
Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. These and other risk considerations are discussed in the fund’s prospectus.
Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To
obtain a summary prospectus and/or prospectus, which contains this and other information, talk to your financial
advisor, call us at (800) DIAL BEN/342-5236 or visit franklintempleton.com. Please carefully read a prospectus before you invest or send money.
 According to Morningstar, as of 9/30/11, 10-year annualized returns for the MSCI Emerging Markets Index vs. S&P 500 were 13.4% vs. 2.8%.
 While the fund may invest up to 20% of its net assets in emerging markets, since its inception on 6/3/08, it has held an average weight 7.67% in the emerging markets. Its Morningstar peer category, US OE Foreign Large Growth, has held an average weight of 13.97% during the same period. The fund’s portfolio holdings are subject to change.